The Effects of Rainfall Insurance on the Agricultural Labor Market - PowerPoint PPT Presentation

The Effects of Rainfall Insurance on the Agricultural Labor Market A. Mushfiq Mobarak, Yale University Mark Rosenzweig, Yale University

Background on the project and the grant • In the IGC-funded precursors to this paper, we study: – Demand for Insurance: How do caste-based informal risk sharing networks mediate the demand for formal index insurance with basis risk? – Effects of Insurance : Do informal risk sharing and index insurance allow farmers to take more risk? • The BASIS grant was awarded to study spillover effects of insurance • We study a specific type of spillover which has a clear theoretical basis, and is policy-relevant: – General equilibrium labor market effects of selling insurance to the landed and the landless

Policy Setting • In India agricultural insurance is marketed exclusively to those who have an “insurable interest” – Landed, cultivator households • Majority of rural Indians engaged in agriculture are landless or near-landless • Raises two issues: – Labor demand varies with rainfall, and the landless therefore need insurance – If insurance allows cultivators to take more risk, then selling insurance only to cultivators may make the landless worse off than if insurance did not exist!

Demand for Insurance in Experiment Insurance Take-up by Subsidy: Cultivator vs Agr Laborer .8 .6 .4 .2 0 Agr labor(pure) Cultivator Agr labor(pure) Cultivator Agr labor(pure) Cultivator ANDHRA PRADESH TAMIL NADU UTTAR PRADESH Subsidy 0 .1 .5 .75

When offered Insurance (ITT from RCT experiment), farmers in Tamil Nadu switch to high-risk, high-return varieties of rice 0.7 Offered insurance 0.68 Not offered insurance 0.66 0.64 0.62 0.6 0.58 0.56 Crops with Good Drought Crops Characterized Tolerance as having Good Yield

With Insurance, Cultivator Output becomes more responsive to rainfall variation 11 10.5 10 9.5 9 8.5 High Informal Indemnification, No Rainfall Insurance Low Informal Indemnification, No Rainfall Insurance 8 Offered Rainfall Insurance 7.5 7 0.75 1.25 1.75 2.25 2.75 Lowess-Smoothed Relationship Between Log Per-Acre Output Value and Log Rain per Day in the Kharif Season, by Insurance Type and Level

Research Needs for Devising Policy • Same results from other insurance RCTs: – Karlan et al 2013 in Ghana – Cole et al 2012 in India • Landless (wage workers) income arguably even more directly tied to rainfall: – heterogeneity in farmer characteristics and land induce idiosyncratic components of risk; – all agricultural wage workers of the same gender receive the same wage for any given operation/crop • Important to study the details to evaluate and devise proper insurance marketing policy – e.g. does labor demand become more volatile? – Can the landless self-insure through labor supply changes?

Outline 1: Theory • General-equilibrium model in which both landless (supplying labor), and cultivators (hiring labor) face risk but no borrowing constraints. • Theory: Labor Demand Effect – subsidizing rainfall insurance for cultivators results in more risk for wage workers: – wages higher but more volatile across weather states • Theory: Labor Supply – Subsidizing rainfall insurance to wage workers reduces wage volatility (via labor supply: uninsured work more than insured in the bad state) – Increases profit volatility for farmers

Outline - Empirics • RCT offering rainfall (monsoon onset) index insurance to 5000+ cultivators and landless agricultural workers in three states in India (UP, AP, TN) • Individual-level random variation in insurance offers and weather-based payouts – Effects on labor supply and seasonal migration for the landless, and labor demand by cultivators • Village-level random variation in proportions of cultivators and wage workers offered insurance – Effects on demand for insurance by landless, on labor supply and demand (through equilibrium wage effects)

Key Results • Proposition 1 : Increase in ( w H – w L ) will increase demand for insurance among landless • Proposition 2 : Labor supply of insured and uninsured varies across weather states: – In the bad state, insured labor supply is lower (they get payouts, and have less need for income) – In the good state, insured labor supply is higher (they have paid the premium) • Empirics: we will have variation in both insurance offers and payouts

Delayed Monsoon Onset Insurance Product Agricultural Insurance Company of India (AICI) AICI offers area based and weather based crop insurance programs in almost 500 districts of India, covering almost 20 million farmers, making it one of the biggest crop insurers in the world. Timing and Payout Function Trigger Range of Days Post Onset Payout (made if less than 30-40mm Number (varied across states and (depending on state) is received at villages) each trigger point) 1 15-20 Rs. 300 2 20-30 Rs. 750 3 25-40 Rs. 1,200 Rainfall measured at the block level from AWS (Automatic weather stations)

Key Outcome Variables in Follow-Up Surveys • Cultivators: Detailed information on agricultural inputs by stage of production. – Key for identifying ex ante and ex post investments. – Focus on use of harvest-stage labor, which is surely dependent on rainfall realizations and ex ante (planting- stage) investments. • Information for landless households: – Days worked in agriculture for wages – Days spent working for wages outside the village (temporary out-migration)

Rain per Day in 2011 Kharif Crop Season in Andhra Pradesh, by Rainfall Station Insurance Payout Stations in Red (with Rupee Amount) 10 9 8 7 6 Centimeters 5 4 300 3 300 2 750 1200 1 0

Figure 10: Lowess-Smoothed Relationship Between Hired Male Harvest Labor Use and Rain per Day in the Kharif Season among Farmers, by Insurance Offer 100 Offered Rainfall Insurance 80 No Rainfall Insurance 60 40 20 0 2 4 6 8 10 12 14 16

Ex-post Labor Supply Response: Temporary Migration • The landless migrate if buy insurance, but no payout • This labor supply effect mitigated with more rainfall • Migration effect smaller in villages where payouts are made

Concluding Comments • Landless laborer households benefit from insurance and recognize the benefits - – Experimental evidence: their take-up of rainfall insurance was insignificantly different from that of cultivators (Mobarak & Rosenzweig, 2012). • General-equilibrium effects enhance the benefits, raising wages in bad times • Benefits to landless also larger when cultivators are insured; they pass on risk in the form of greater disparities in wages between low and high-rainfall states. • Symmetrically, cultivators incur lower profits in bad times when the landless are insured. • Political Economy? The absence of large-scale schemes providing weather insurance to labor households may not be due entirely to oversight.